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Opening up markets to neighbors : gains for smaller countries in South Asia (English)

A large body of literature shows that all countries benefit from trade openness, irrespective of size; other work shows that smaller countries benefit even more from mutual trade liberalization, due to their greater dependence on trade. Trade liberalization, however, can be a difficult political sell because economic gains are often dispersed over time and space, while losses can be immediate. Vested interest groups lobby governments for protection from more competitive imports. Moreover, when one of the countries involved in the process is disproportionately large, lobbies in smaller countries find it easier to bargain for domestic protection, on the often-misplaced grounds that the larger economy might swamp the smaller one. The gains from closer association between a large and small country are often missed. Larger countries have strong protectionist lobbies as well, but since trade is usually a smaller share of their economies, they may be somewhat less influential than their counterpart lobbies in smaller countries. In all countries, whether large or small, strong leadership appears to be critical in envisioning and implementing trade reforms. In South Asia, the South Asia Free Trade Area (SAFTA) came into effect in 2006 But free and unfettered trade is still a work in progress. For example, all countries maintain long ‘sensitive lists’, where the SAFTA tariff concessions do not apply. Even India, which offers virtual free trade to the least developed countries (LDCs), still has extensive protection on imports from other countries in the region. Drawing from theory and evidence, this note looks at how all countries, especially the smaller ones, could gain from mutual trade liberalization (one critical aspect of regional integration). Consumers and exporters in smaller countries benefit significantly from trade liberalization, as goods become cheaper for consumers while exporters gain access to a much larger market and more competitive inputs. Import-competing firms (producers) in the smaller country present a mixed picture, with the more productive ones gaining (especially ones that use imported inputs) and the less efficient losing.

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Citation

Kathuria,Sanjay Shahid,Sohaib

Opening up markets to neighbors : gains for smaller countries in South Asia (English). SARConnect,no. 1 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/257191468104053318/Opening-up-markets-to-neighbors-gains-for-smaller-countries-in-South-Asia